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Vol. XXVII No. 6, July 1-15, 2017

Time for TN to rein in finances

by Our Financial Correspondent

Tamil Nadu has the dubious distinction of topping the southern states in revenue deficit, going by a study of State finances prepared by the Reserve Bank of India.

The Government’s Budget for 2017-18 shows that expenditure has been growing faster than revenue. Revenue grew from Rs. 1,29,000 crore in 2015-16 to Rs. 1,59,000 crore in 2017-18 (Budget), whereas in the same period expenditure is expected to grow from Rs. 1,41,000 crore in 2015-16 to Rs. 1,75,000 crore in 2017-18, widening the revenue deficit from Rs. 12,000 crore to Rs. 16,000 crore. The same document ­explains that the rise in expenditure is due to increase in food subsidies, loan waivers, free electricity and other items.

About 78 per cent of revenue goes towards expenditure of a non-development nature, constricting discretionary fiscal space for improving public services and leveraging borrowings for productive asset creation. Interest payment as a percentage of revenue receipts for the State is large, at 13.8 per cent for 2016-17, Kerala outdoing Tamil Nadu being the largest at 14.9 per cent. Telangana presents a refreshingly different picture at 7.6 per cent to be reckoned as the best disciplined state (RBI Study). Growing revenue deficit is an area of concern, as it means that we are borrowing even to meet routine needs.

Overlooking this compulsive need to borrow, even the quality of spending has not been irreproachable. Capital expenditure on Health and Family Welfare to aggregate expenditure fell steeply from 9.78 per cent in 2013-14 to 7.61 per cent in 2014-15 and similarly capital expenditure on water supply, sanitation, urban development fell from 64.02 per cent of total expenditure to 41.86 per cent during the same period, indicating a declining emphasis on essentials (CAG Study). Increasing resort to free doles may produce votes, neglecting the foundation for growth and welfare.

Referring to quality of spending, it is necessary to clarify that the “accountant’s” classification of expenditure as capital and revenue could be misleading. Increasing hospital and nursing staff or strengthening conservancy staff or reinforcing police force or improving their emoluments – all go towards improving public services although they are categorised as revenue expenditure. The classical example is that of the mid-day meal scheme which is revenue expenditure. Closer insight shows that it has built children of yesterday into healthy youth of today, reduced school drop-outs thereby improving literacy and brightening family futures. This so-called revenue expenditure built the community’s human asset. The late MGR had the vision to think beyond numbers and conventional wisdom to perceive great value in providing nutrition to children. We have a much healthier youth today than when this scheme was introduced in the 1980s. On the other hand, capital expenditure on arches, memorials and cosmetic beautifications do not contribute to growth and welfare.

The State’s outstanding debt has surged as a percentage of GSDP from 16.14 per cent in 2012-13 to 20.90 per cent in 2017-18 (Budget) and in terms of value it stands at a staggering Rs. 3,14,000 crore in 2017-18 (Budget) – twice as much as revenue, indicative of deteriorating financial discipline. Fiscal deficit has gone up from Rs. 16,500 crore in 2012-13 to Rs. 42,000 crore in 2017-18 (Budget). Fiscal deficit as a percentage of GSDP was as high as 4.58 per cent in 2016-17, breaching the Tamil Nadu Fiscal Responsibility Act (TNFRA) norm, but the Budget promises to bring this down to 2.79 per cent in 2017-18. That constitutes a challenge, but at least signals an awareness that the situation needs control.

Neither fiscal deficit nor borrowing is undesirable by itself, provided it is within repaying capacity, and the proceeds are utilised for creating social assets, improving public services/utilities and capacity building. A healthy fiscal deficit would ideally be self-resolving if it finances creation of the basic assets that spur growth and stimulate tax revenues to be able to repay the borrowings. If it is to meet revenue deficit, it is like borrowing for everyday living. Uncontrolled revenue deficit leads eventually to borrowing to return previous borrowing. That means that all of annual borrowing is not available for discretionary spending. If this trend continues, borrowing for repaying previous borrowing snowballs over time, leading to a debt trap.

There are silver linings. The State’s revenue has been growing at ten per cent, year upon year, from 2015-16 to 2017-18 although it could have taken better advantage of GSDP growth to tap revenue sources. The State’s own revenue constitutes as much as 69 per cent of its total revenue receipts, including grants-in-aid from the Centre. These are signs of a reasonable degree of self-reliance that could be built upon to erase the revenue deficit altogether. Till 2015-16, the fiscal deficit norm was within the limit under TNFRA. It was breached in 2016-17. The Budget promises to bring it back under control. The situation is retrievable if there is political will. We have been writing about poor sanitation and other public facilities, declining quality of life and low All-India ranking for Tamil Nadu which once set the pace for the rest of the country. Political uncertainty must end. Whichever political party is in government, it has no time to lose and must seize the opportunity to clean up the house, resisting competitive populism and reckless waivers. Tamil Nadu can lead the country yet again.